Foes join forces for new tobacco fight
By JOHN BALZ
© St. Petersburg Times, published October 1, 2000
It's rare to find Big Tobacco, state attorneys general and health care professionals at a negotiation table together, and even rarer to find them sitting on the same side. But a new cause, rising gray market cigarette sales, has united these usual opponents in a fight before Congress.
Manufactured by American companies and meant to be sold overseas, gray market cigarettes appear mostly in mom-and-pop convenience stores in packaging only slightly different from normal cigarettes. At discounts of about $8 per carton, the cigarettes are a favorite among teenage smokers.
Sales of the cheaper products cut into the profit margins of cigarette manufacturers, wholesalers and retailers that sell regular cigarettes. Health care advocates loathe the product because it is tailor-made for American youth. And states lose money meant to be used for smoking-related health care programs.
As part of the 1998 settlement between tobacco companies and state attorneys general, state governments receive payments partially based on the volume of domestic cigarettes sales. But gray market cigarettes manufactured abroad and sold inside U.S. borders are not considered part of domestic sales, thus their sales are not included in the agreement.
After failed attempts over the past two years, this odd triumvirate has sprouted, anxiously pressuring lawmakers to strike a deal before a new administration moves into the White House. With the help of Sen. Ken Conrad, D-N.D., they have secured legislation to prohibit sales of gray market products and proponents say their broad coalition of support can push the bill through quickly.
Support from such a diverse group of backers makes the measure more likely to pass.
"It's a weird alliance," said Kim Tucker, Florida deputy general counsel, who works in Washington on behalf of state Attorney General Bob Butterworth. "We're coming at this from different angles, but it has a negative financial impact on all of us."
The coalition's legislative goals are to prohibit the importation of "foreign source" cigarettes; close tax loopholes that benefit traffickers of cheap cigarettes; strengthen law enforcement to capture gray- and black-market cigarettes; and tighten packaging laws to keep out the few "export label" cigarettes that continue to make their way into the country with makeshift adhesive labels.
The gray market was born out of a loophole in the '98 settlement, which obliged tobacco companies to pay more than $245-billion to 46 states for medical damages. Entrepreneurial retailers began importing discounted cigarettes made by American companies in the United States and overseas that were intended for sale in foreign countries. They shuttled the products through a shady underground distribution network where they ended up on local convenience store shelves at prices $7 to $8 less per carton.
The packaging is almost identical to normal cigarettes except for health warning labels that read "U.S. Surgeon General" instead of "Surgeon General," and small "tax exempt" stickers on the outside of the cellophane.
On Jan. 1, due to a small provision in the 1997 Balanced Budget Act, the re-importation of cigarettes made in the United States but earmarked for foreign markets -- known as "export label" products -- became illegal. Importing cigarettes made across the ocean -- known as "foreign source" products -- however, remains lucrative and legal.
Since 1998, 44 states including Florida have enacted varying degrees of anti-gray market legislation. But critics say that without a nationwide bill, the products will continue to find a way into the country.
In 1999, domestic cigarette shipments, and consequently payments to the government under the settlement, declined by almost 15 percent in Florida, while gray market sales accounted for almost 16 percent of total cigarette sales. Although the two statistics are not directly related, Rep. Clay Shaw, R-Fort Lauderdale, said the similarity of the percentages shows a trade-off.
Critics of Big Tobacco say gray market or no gray market, the industry can't lose. Either it reaps bigger revenues by closing the loophole, or it pays less to the states by leaving it open.
"The tobacco companies are clearly the big winners," said David Sweanor, a lawyer for the Canada-based Non-smokers Rights Association and an adviser to the American Medical Association. "They aren't paying more taxes and it's their margins that take the beating."
Tobacco industry officials acknowledged that they make lower settlement payments if gray market sales increase, but they insist the companies want to comply with the "letter and spirit of the agreement" and pay the full amount of the settlement.
"We've put legal teeth to our position that we don't want to see gray market," said John Singleton, a spokesman for R.J. Reynolds.
Besides, Singleton said, the revenue losses to the companies from gray market sales are greater than the reduction in their payments.
The largest share of Florida gray market cigarettes, about 90 percent, is Marlboro. Thus it is no surprise that Philip Morris has been particularly active in court, filing suits against Indiana, Kentucky and California gray market retailers. At risk are the consumer's safety and company's reputation, said Brendan McCormick, spokesman for Philip Morris,.
"We want consumers to have good experiences with our brands," he said. "It's the brand, not the retailer, that suffers."
The Federal Trade Commission currently allows low volume shipments of imported cigarettes with adhesive "U.S. Surgeon General" labels to pass through customs, a practice that Tucker called a violation of the Federal Cigarette Labeling and Advertising Act requiring health warning labels on all packages of cigarettes.
The commission said the adhesive labels do not violate the act.
The easiest way to identify a gray market product is the flavor. Marlboro Reds sold in India contain a different blend of tobacco suited to the tastes of Indian consumers. Cigarette manufacturers complain that the gray market products found on U.S. shelves frequently have returned from a trip halfway around the world, passing through poorly ventilated warehouses and improperly packed shipping crates. The result is an inferior product.
But not necessarily a more harmful one. From a health perspective, the disparity between gray market cigarettes and normal cigarettes is purely cosmetic, said Dr. Peter Gariti, clinical director of addictions at the University of Pennsylvania Health Center.
"A poison is a poison, it's still going to get you," he said.
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